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Facts
The assessee, Vikas Kumar Chhajer, filed his income tax return for AY 2022-23, which was selected for scrutiny. The Assessing Officer (AO) made an addition of Rs. 9,22,76,960/- as unexplained cash credit under Section 68, based on information from a third-party search on the 'JM Jain Group', alleging unaccounted cash transactions recorded in their 'JSK server'. The assessee denied knowledge of these transactions and claimed denial of natural justice as evidence was not properly provided, and cross-examination of third parties was not allowed. The CIT(A) vacated the addition.
Held
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, confirming that the AO's order violated the principles of natural justice. The Tribunal emphasized that denial of the right to cross-examine third parties, whose statements or evidence formed the basis of an addition, renders the assessment order a nullity. The ITAT noted that the AO failed to provide proper copies of the excel sheets or allow cross-examination, and the presumption under Section 132(4A) could not be drawn against an assessee not subjected to a search operation.
Key Issues
Whether an addition made under Section 68, based on third-party documents/statements obtained from a search on another entity, is sustainable when the assessee is denied the opportunity for cross-examination and proper access to the underlying evidence, thereby violating principles of natural justice.
Sections Cited
143(3), 68, 132, 143(2), 144B, 132(4A), 131(1A)
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Income Tax Appellate Tribunal, Visakhapatnam Bench
Dr. Satyasai Rath, CIT-Departmental Representative (for short “CIT-DR") at the threshold of hearing of the appeal, relied upon the assessment order. The Ld. CIT-DR submitted that, as the CIT(A) has powers co-terminus with those of the A.O., therefore, in case, if he was of the view that the assessee had been divested of his right to cross- examine the aforementioned parties, whose statements had formed the basis for making the addition in the hands of the assessee, then nothing prevented him from either allowing such cross-examination or directing the A.O. to do the needful.
The Ld. CIT-DR submitted that the concrete facts, that had surfaced in the course of the search proceedings conducted in the case of the “Jain Group”, which revealed beyond doubt that the impugned cash transactions were carried out by the assessee, during the subject year, and there was no justification for the CIT(A) to have summarily vacated the addition made by the A.O. Elaborating further on his contention, the Ld. CIT-DR submitted that the assessee, in the course of the assessment proceedings, had though initially distanced himself from the cash transactions that were retrieved by the Department, in the course of the search proceedings, from the parallel server maintained by “JM Jain Group” i.e., the SAP-JSK server, which was being used by the latter for recording transactions between vendors and customers, but had interestingly, thereafter come up with an alternative plea that even if it was to be assumed that the said transactions had materialized, then, the addition in his case was liable to be restricted only to the extent of the “Gross Profit” element, i.e., the difference between the purchases and sales, and the entire amount of the transactions could not be added in his case. The Ld. CIT-DR submitted that the aforesaid alternative contention of the assessee, in itself, revealed that the transactions retrieved in the course of the search proceedings on “Jain Group” were the actual unaccounted transactions of the assessee.
Admittedly, it is a matter of fact borne from the record that, during the course of search proceedings conducted on “JM Jain” group, a parallel server, commonly known amongst its employees as “JSK Server”, i.e., a SAP-based server that was used for recording transactions between vendors and customers containing cheque transactions (accounted for in the books of accounts of vendors and customers) and cash component (not accounted for in the books of accounts of vendors and customers) was found. On a perusal of the assessment order, we find that numerous other pieces of evidence were found through which the data of the parallel books of accounts – “JSK Server” was corroborated. The A.O. had observed in the assessment order that corroboration of the “JSK server” was established through, viz. (i). admission by key employees and cash collectors of vendors during the search; (ii). analysis of the seized material (Kachcha/Pakka Invoices/Reminder Ledger seized during the search proceedings; (iii). analysis of Ledger/Challan of vendors and customers sent through e- mail delpostmen@gmail.com; (iv). analysis of Bank Statement/Ledgers of vendors and customers; (v) convergence of the JSK server and JMJ Server (vi). the miscellaneous files/documents found in the digital device cloned during the search. Accordingly, the A.O. observed that the corroboration of the “JSK server” at multiple levels squarely established that the “JM Jain” group was routinely engaged in generating out-of- book commission and interest income.
Also, the A.O. observed that the analysis of the parallel server that was commonly known amongst its employees as the “JSK server”, revealed that the same housed transactions between thousands of customers and vendors from the Financial Year 2020–21 onwards. It was further observed by him that though the server contained data from the Financial Year 2020–21 onwards, the in-house forensic team of the department was able to recover deleted data pertaining to the Financial Year 2019–20 as well. Accordingly, the data from the “JSK server” retrieved from the post-search covered the period from F.Y. 2019–20 up to F.Y. 2022–23, i.e., up to May 2023. Apart from that, the A.O. observed that Shri Anil Swami, Accountant for M/s. JM. Jain at Gandhinagar office, has in his statement recorded under Section 131(1A) of the Act, recorded in the course of the search proceedings on 31.05.2022, decoded the recording of the transactions by the Jain Group.
Be that as it may, we find that the assessee, on being confronted with the excel sheets and the ledger accounts, as were retrieved by the Department, during the course of the search proceedings from the “JSK server”, had distanced himself from the cash transactions therein recorded. As observed hereinabove, it was the assessee's claim that he was unaware of the transactions recorded by the aforesaid entities of the “Jain Group” in their parallel books of accounts.
Considering the observations of the authorities below, we are of the firm conviction that the A.O., except for relying upon the excel sheets/ledger accounts retrieved from the SAP-based “JSK server” during the course of search & seizure proceedings conducted on “JM Jain” Group, had failed to place on record any documentary evidence, which could irrefutably evidence that the cash deposits disclosed under the name of the assessee in the seized documents were the actual transactions carried out by the assessee. We concur with the Ld. CIT(A) that whenever reliance is placed on evidence discovered from the premises of a third party or based on the evidence of third parties, certain principles of natural justice have to be strictly followed, failing which the impugned addition made in the hands of the assessee cannot be sustained and is reduced to a nullity. Ostensibly, the assessee had though stated before the A.O. that the scanned copies of the excel sheets, based on which the impugned addition was sought to be made, were vague, but despite that, no proper photocopies of the same were made available to him. Also, it is a fact discernible from the order of the CIT(A) that the assessee, despite specific request for the cross- examination of the “JM Jain” Group entities, i.e., the third parties on whose statements adverse inferences were sought to be drawn against him, was however, most arbitrarily divested of the said statutory right.
We are of the firm conviction that not allowing the assessee firm an opportunity to cross-examine the aforementioned third party, while acting upon the latter’s statements for drawing an adverse inference in his hands, is nothing but a flagrant violation of the basic tenets of the principles of natural justice i.e. audi alteram partem. Our aforesaid view that denial to the assessee to cross-examine the witness whose statement was made the basis of the impugned addition made in his hands is a serious flaw which renders the order a nullity, as it amounts to a violation of the principles of natural justice, is supported by the judgment of the Hon'ble Supreme Court in the case of M/s. Andaman Timber Industries Vs. Commissioner of Central Excise [(2015) 281 ELT 431 (SC)] and Civil Appeal No. 4228 of 2006, dated 02.09.2015. The Hon'ble Supreme Court after exhaustive deliberations on the denial of the right of an assessee for cross-examination of a witness, whose statement was being acted upon by the adjudicating authority and had formed the basis of drawing an inference in his hands, had held that not allowing the same amounted to violation of the principles of natural justice because of which the assessee was adversely affected. The Hon’ble Apex Court further observed that not allowing cross-examination constituted a serious procedural flaw which rendered the order a nullity. The Hon’ble Supreme Court disapproved the view taken by the Tribunal, which had observed that no useful purpose would have been served by allowing the cross-examination of third parties to the assessee before it. The Hon’ble Apex Court had observed that it was not for the Tribunal to have guessed as to for what purpose the assessee/respondent wanted to cross-examine the third party and what extraction he wanted from them. The Hon’ble Supreme Court, considering the aforesaid facts, had set aside the impugned order passed by the Tribunal and allowed the appeal. For the sake of clarity, the relevant observations of the Hon’ble Apex Court are culled out as under:
“We have heard Mr. Kavin Gulati, learned senior counsel appearing for the assessee, and Mr. K. Radhakrishnan, learned senior counsel who appeared for the Revenue. According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.
As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice. We, thus, set aside the impugned order as passed by the Tribunal and allow this appeal.”
Also, we find that a similar issue had been looked into by the Hon’ble High Court of Rajasthan in the case of CIT, Central, Jaipur Vs. Sunita Dhadda (2018) 100 taxmann.com 525 (Rajasthan). The indulgence of the Hon’ble High Court was, inter alia, sought for adjudicating, viz., (i). that whether an assessee who was fastened with the tax liability based on the testimony of a third party, was supposed to be afforded an opportunity for cross-examination; and (ii) that what would be the effect in case, the opportunity for cross-examination was not afforded. We find that the Hon’ble High Court, drawing support from the judgment of the Hon'ble Supreme Court in the case of M/s. Andaman Timber Industries Vs. Commissioner of Central Excise (supra) along with a host of other judicial pronouncements, had approved the view taken by the Tribunal that had held that for the said failure on the part of the A.O. to allow cross-examination of the third party, the adverse inference that was drawn by the A.O. in the hands of the assessee before them were liable to be vacated. Also, we may herein observe that the aforesaid judgment of the Hon’ble High Court of Rajasthan in the case of CIT, Central, Jaipur Vs. Sunita Dhadda (supra) had thereafter been approved by the Hon’ble Supreme Court in the case of CIT Vs. Sunita Dhadda (2018) 100 taxmann.com 526 (SC) and the petition filed by the Department had been dismissed. Further, we find that the Hon’ble High Court of Gujarat, in the case of Laxmanbhai S. Patel Vs. CIT (2010) 327 ITR 281 (Guj.), had deliberated upon the ramifications of not allowing the opportunity of cross-examination to the assessee. It was observed that, in the absence of allowing of cross-examination, the addition which was based on the statement of the third party was required to be deleted on the ground of violation of the principles of natural justice. The Hon’ble High Court of Bombay, in the case of M/s R.W. Promotions P. Ltd. Vs. ACIT (2015) 61 taxmann.com 54 (Bombay), had held that the right to cross- examination is a part of the audi alteram partem principle, and the same can be denied only on exclusive and extraordinary grounds, that too, only after recording them in writing and then communicating the same to the assessee. It was further observed by the Hon'ble High Court that the denial of the right to cross-examine renders the assessment against the assessee as null and void. Further, we find that the ITAT, Delhi in the case of Amarjit Singh Bakshi (HUF) Vs. ACIT (2003) 86 ITD 131 (Delhi) (TM) has held that where the documents in question were not recovered from the possession of the assessee, but were recovered from somewhere else, and the assessee was not allowed to cross-examine the concerned person, then no addition could be made in the hands of the assessee based on such documents..
We thus, in the backdrop of the aforesaid facts wherein neither the A.O. had acceded to the request of the assessee for providing proper copies of the excel sheets, based on which adverse inferences were sought to be drawn in his case; nor had acted upon the specific request of the assessee for allowing the cross-examination of “JM Jain” Group entities i.e., the third parties whose statements had formed the basis of the adverse inferences drawn in the case of the assessee, therefore, we find no infirmity in the view taken by the CIT(A) who had rightly vacated the impugned addition made by the A.O. under Section 68 of the Act.
Resultantly, finding no infirmity in the reasoned order of the CIT(A), we find no substance in the appeal filed by the Revenue, which, thus, being devoid and bereft of any substance is dismissed.
Order pronounced in the Open Court on 25th July, 2025.